Kasich’s Severance Tax Facing Bipartisan Resistance

The Ohio Farm Bureau (OFB) has officially
come out against Gov. John Kasich’s plan to tax oil and gas production.
The move from the Republican-leaning agricultural group is yet another
blow to Kasich’s tax plan, which raises the severance tax on the
oil-and-gas industry to pay for a cut to Ohio’s income tax.

By now, it’s clear the Republican
governor is facing bipartisan resistance to his proposal, but the issue
at play isn’t just the tax hike on a booming Ohio industry. For many
Republicans and Democrats, the big problem is how the new funds will be
used.

The bipartisan opposition to Kasich’s
plan showed its strength in March, when the Republican-controlled Ohio
legislature shelved the proposal and opted to work on regulations on the
oil-and-gas industry instead.

But the opposition hasn’t stopped Kasich.
As some may recall, Kasich’s token enthusiasm for his proposal led him
to claim that Ohio’s hydraulic fracturing, or “fracking,” industry could
be worth $1 trillion. To be sure, there isn’t much to back up the
claim, as Arthur Berman, a Texas-based petroleum geologist and
independent energy consultant, told CityBeat in August (“What’s
Worth $1,000,000,000,000?,” issue of Aug. 8), but the rhetoric shows the
level of commitment Kasich is giving to his tax proposal.

In a statement, the OFB defended its
position by highlighting some of the alternatives to Kasich’s plan: “If
there is an increase in the severance tax, it should address local
government funding, infrastructure needs, local and state economic
development and mitigation of negative impacts on local communities and
the environment.”

It’s easy to see why OFB wants the money
to flow into local government funds.

Cities and counties around Ohio
have been hit hard by state budget cuts in recent years. In Cincinnati,
the city government claims most of 2013’s $34 million deficit was caused
by a 50 percent reduction in Ohio’s Local Government Fund. The
reduction reduced revenues by $22.2 million for Cincinnati — nearly
two-thirds of the estimated deficit.

Nonprofit research organization Policy
Matters Ohio has repeatedly pointed to the devastating cuts as a major
problem. At Cuts Hurt Ohio, a website meant to raise awareness about
state budget cuts, the group shows the state has cut $1.4 billion to
local governments in the 2012-2013 budget. Hamilton County alone has
lost $105 million. That’s on top of $1.8 billion in statewide cuts and
$117 million in countywide cuts to education.

The argument essentially comes down to
whether Ohio should pursue tax cuts or more spending. Economic research
tends to support the latter. An April 2011 report from the Economic
Policy Institute based on Congressional Budget Office data found
corporate tax cuts generate 20 cents in economic activity for every
dollar cut, while infrastructure spending produces $1.75 in economic
activity for every dollar spent. Similarly, tax cuts for the middle and
lower classes produce $1.05 in economic activity for every dollar cut,
while federal programs providing aid to states produce $1.25 in economic
activity for every dollar spent.

In a nutshell, direct government spending
produces more economic growth than tax cuts, so putting any new revenue
in the Local Government Fund and infrastructure spending would likely
have better economic results than a statewide income tax cut.

But if Kasich insists on following
through with his income tax cut, how should it be done? Should the tax
cut favor the upper class, or “job creators,” as Republicans like to
call them? Or should the cut favor the lower and middle class?

A substantial amount of research shows
the income tax cut should be progressive, meaning in favor of the lower
and middle class. Most recently, in its analysis of the “fiscal cliff,”
the Congressional Budget Office made a strong case for the progressive
tax system. Its data found letting the Bush tax cuts on the wealthy
expire would reduce the deficit by $42 billion and only sink the gross
domestic product, which measures U.S. economic output, by 0.1 percent.
In contrast, letting the Bush tax cuts on the lower and middle classes
expire would cut the deficit by $288 billion and lower GDP by 1.3
percent.

In other words, tax cuts for the lower and middle classes have nearly twice the economic impact on a per-dollar basis.

Of course, that’s all assuming Kasich can
even get his oil-and-gas severance tax approved in the 2014-2015
budget. With increasing opposition from both the left and right, that’s
looking less and less likely.